TQ Restructuring

By Daniela Münster

Restructuring companies without them declaring bankruptcy – this is what the German Corporate Stabilisation and Restructuring Act, or StaRUG for short, is aimed at. It came into force on 1 January 2021. Companies in crisis involve selected creditors in implementing necessary re­struc­turing measures and thus avoid insolvency proceedings. In addition, StaRUG creates the legal frame­work that obliges companies to identify issues at an early stage and for crisis manage­ment. The act thus helps them navigate crises more effectively.

However, the StaRUG process is not a one-size-fits-all solution for all re­struct­uring situations. Companies facing mainly operational or strategic challenges will often fare better in regular insolvency proceedings. StaRUG is intended primarily for resolving financial problems.

Benefits of StaRUG

The StaRUG procedure is a guideline for pre-insolvency restructuring and comes with the necessary toolbox. At the centre of the process is a re­struc­turing plan drawn up by the company, which should demonstrate that there is a very good chance of over­coming the crisis if it is implemented.

A special feature of this process is that the company is not obliged to involve all creditors in the restructuring process but can choose which ones it wants to include. This makes success­ful implementation much more likely. In addition, the company’s manage­ment retains its autonomy in handling the restructuring process. The manage­ment team decides if they want to involve a court. Working with a court, however, can significantly improve legal certainty during the process, in particular in cases where not all creditors agree to the re­struc­turing plan.

Only a 75 per cent majority of creditors is required to validate the plan. In addition, it is possible to outvote creditors who reject the plan in a StaRUG procedure, which significantly reduces the risk of it being blocked.

And this approach has another benefit, but only at first glance. Since StaRUG-type re­struc­turing is a non-public process, not many milestones need to be communicated. However, this is not necessarily an advantage at all. In particular during in­secure times, stake­holders want to receive information that is as detailed as possible, and they will demand that information for reasons of transparency.

Systematic, tactful, and sensitive communi­cations are required

Finding the right way to communicate with stake­holders is thus a balancing act. Another problem with the StaRUG process is that it is not yet widely known or used. The need for explanation is there­fore even higher – especially when comparing StaRUG to conventional insolvency proceedings.

Internal target groups will want to know what manage­ment is doing to get the company back on track. They want to receive regular updates about the situation in a timely manner from a manage­ment board that is present and visible. They do not want to be left on their own with their fears and concerns– instead they want to feel that manage­ment is working on turning the situation around. Communicating with tact and empathy is particularly important when job cuts or site closures are on the cards. Co-determination bodies must also be involved in the process at an early stage.

And the interests of individual stake­holders must be addressed directly in external communications. Where site closures are to be part of the process, an open dialogue with political decision makers is crucial in order to potentially get them to accept the measures. Inter­action with the media is a particularly sensitive topic. If information gets out to the public sphere unmanaged, this may feed into speculation that could lead to creditors, customers, and suppliers feeling more insecure about the situation.

Communications around StaRUG should thus always be aimed at staying in control of how the situation is perceived and it is crucial to be forward thinking in accurately and systemati­cally relaying information to the relevant target groups.

Procedure under review by the Federal Ministry of Justice – StaRUG in stake­holders’ interest?

Small shareholders of listed companies – with support from DSW, Germany’s leading association for private investors – are criticising the fact that the StaRUG procedure can lead to de-facto expropriation.

According to DSW, the StaRUG procedure is still lacking considerably when it comes to protecting affected share­holders. The association is thus demanding that amend­ments be made to the act by the German Federal Ministry of Justice (BMJ). The BMJ is currently evaluating whether StaRUG in its current form can perform as intended by the legislator. The results of the review are expected to be published in July 2024 – amend­ments to the act seem possible.

More than pre-insolvency restructuring – identifying and managing crises at an early stage

The StaRUG procedure also encompasses a duty to identify crises early and to manage them. Accordingly, the manage­ment of every company is obliged to ensure better quality and higher value in terms of information of their data. In this context, managing directors and boards must assess potential risks associated with the business at an early stage. If potential negative develop­ments are being identified, counter measures must be taken without delay and the relevant control body, for example the supervisory board, must be notified.

Photo: iStock.com/Igor-Kardasov